Barclays and Deutsche most at risk to private credit ‘profit blow’

Fears that private credit could spell trouble for the global financial system have been further amplified following a new report that forecasts losses associated with the sector could slash profits at top European banks.

Banking giants Deutsche and Barclays rank among “most exposed” banks to a private credit reckoning due to their north of three per cent exposure, analysts at Bloomberg Intelligence said.

Barclays is estimated to have around £20bn in exposure to the market, equivalent to around 4.4 per cent of its total loans. Meanwhile, Deutsche’s €25.9bn amounts to just over five per cent of its loan book.

Philip Richard, senior industry analyst at Bloomberg Intelligence, estimated losses related to the sector could deal a “five per cent profit blow to some” top European names. In a “worst-case outcome,” he estimated losses from private credit could reach €12.6bn (£11bn).

Though, Richard warned the limited disclosures from lenders would make this “a likely focus” of first-quarter results.

“Little disclosure on banks’ exposure to, and links with private credit leaves a potential fallout from a build-up of losses,” he added.

Barclays took a hit from Tricolor collapse

JP Morgan boss Jamie Dimon, who is often viewed as the world’s most influential banker, has been a vocal sceptic of the activity in the private credit industry.

“Private credit does not tend to have great transparency or rigorous valuation ‘marks’ of their loans – this increases the chance that people will sell if they think the environment will get worse,” Dimon wrote in his annual shareholder letter.

The Wall Street boss had warned of “cockroaches” after car parts maker First Brands and subprime auto lenders Primalend and Tricolor all collapsed in a matter of days under ballooning debts.

In its third-quarter update, Barclays made a £110m “single name” credit impairment charge in its investment banking arm. The charge was related to the banks’ exposure to Tricolor – a US auto-dealership which sent jitters through the private credit market after its collapse due to loan-defaults.

Barclays, along with its peers JPMorgan and Fifth Third Bancorp, was a warehouse lender to Tricolor. The bank’s chief CS Venkatakrishnan, said the exposure to Tricolor was “obviously not a surprise but the surprise was the fraud”.

“We take our credit risk management very seriously at all points in the cycle, and credit lending has to be prepared for all outcomes, including fraud,” he said.

In Britain, the private credit market is estimated to have grown by 56 per cent since 2015 to $185bn (£138bn) making it the second largest after the US, according to a recent report by the House of Lords.